tax planning for physicians

Three ways to make the best of a bad (401k) situation | W. Ben Utley CFP® writes for Orthopreneur

We see the changes that physicians make to improve their financial security, but one item is usually beyond their control: their 401(k) plans. Unless you are self-employed, there is practically nothing you can do about your 401(k)’s underwhelming investment options, ridiculously low contribution limits or perverse tax consequences. If your 401(k) is your main (or maybe your only) investment vehicle for retirement, we have good news for you. It is possible to work around your 401(k) plan’s limitations, so that you can get back on track toward retirement.

Low Limits Many physicians operate under the mistaken belief that if they max out their 401(k) plan contributions, they will be set for retirement. But did you know that the maximum amount of money you can elect to defer into your 401(k) this year is only $17,500 ($23,000 if you will be age 50 or older by December 31)? That’s roughly $1,400 deducted from your paycheck each month ($1,900 per month if you are age 50 or older).

Have you ever met a physician who could live well on $1,400 a month? We haven’t. In fact, the physicians whom we serve are planning to spend more like $10,000 per month in retirement, and that’s after tax. It would take a miraculously high rate of return to turn $1,400 per month pre-tax into $10,000 per month after-tax. As you can see, many physicians are well on their way to a retirement disaster.

To improve your odds of reaching your retirement goal, you can save outside of your 401(k) plan. Even if you cannot deduct the contributions you make to a Traditional IRA, you can still contribute $5,500 this year ($6,500 if you will be age 50 or older by December 31), and if you max out your own IRA, your spouse can also contribute up to $5,500 to his or her IRA ($6,500 if he or she will be age 50 or older by December 31), even if they are not earning an income. Depending upon your tax situation, it might also make sense to convert these contributions to a Roth IRA, doing what is known as a backdoor Roth IRA contribution. Once the money is in a Roth IRA, it can grow tax-free for the rest of your life. Of course, this still might not be enough to allow you to retire comfortably, so you should consider investments outside of your 401(k) plan and IRAs.

Underwhelming Options You probably haven’t read the fine print behind your 401(k) plan, but you are betting that your practice manager has carefully vetted both your 401(k) plan provider and the investments offered inside your plan. Don’t believe it! We have found that busy managers either fail to read the fine print or lack the experience to understand what they have read. Despite new laws requiring plain English disclosures of investment-related fees, many employers continue to keep physicians locked into expensive plans with unpalatable investment options.

If your plan charges more than 50 basis points (0.50 percent) on top of mutual fund operating expenses, your plan’s costs are draining an unfair share of your retirement savings. To get this under control, you need to raise your voice, but carefully. We regularly see very expensive plans that persist simply because of office politics.

It’s more common to see an investment lineup consisting mostly, if not entirely, of actively managed mutual funds. This is a sign of ignorance on the part of your plan fiduciaries. At a time when most prudent investors recognize that passively managed index funds have been shown to have delivered better results at a lower cost than the average actively-managed fund, there’s no good reason that your plan should continue to limit you to subpar investment options.

To work around these issues, look at your retirement investments holistically. Think about your 401(k) plan, your Traditional IRAs and your after-tax accounts (mutual funds and brokerage accounts) as if they were all one retirement portfolio. Then use the least-bad investment options from your 401(k) and pair them with the best options available within other accounts that make up the balance of your portfolio.

Tax Time Bomb You already know that physicians pay more than their fair share of taxes. But did you know that you are probably setting yourself up to pay more taxes on your 401(k) than you really should? That’s right. There’s a perverse little wrinkle in the tax code that can turn your 401(k) plan into a tax time bomb.

To understand this trap, you need to know a little bit about how investments are taxed. Withdrawals from your 401(k) plan will be taxed at your marginal income tax rate, which may be as high as 39.6 percent for Federal income tax. At the same time, capital gains and qualified dividends from mutual funds held in taxable accounts outside your 401(k) plan are taxed at a maximum Federal rate of 23.8 percent (which is 20 percent plus the new 3.8 percent Medicare surtax).

This means that your 401(k) nearly doubles the tax rate you pay on capital gains and qualified income by effectively converting these tax-favored returns into tax-trapped ordinary income. Consider holding equity mutual funds in a taxable account, or better yet, own them in your Roth IRA or the Roth subaccount of your 401(k) if you have one.

If your 401(k) is a lousy place to stash your stock funds, what should you hold there instead? Consider low growth, income-producing investments, including bond funds and stable value funds. If you have an appetite for more aggressive fare, consider high yield (junk) bond funds or emerging market bond funds. Outside of your 401(k) plan, these investments may be taxed at your highest marginal rate, so it’s a good idea to protect your income by keeping it inside of the tax shelter of your 401(k) plan.

Again, the best workaround for this tax trap is to view your entire retirement portfolio, including your 401(k) plan, your IRAs and your other accounts that are earmarked for retirement, as one portfolio. Choose to own the best investments in the accounts that make the most sense from the standpoint of expense, risk, return and taxation.

Summary Even if you are stuck with a stinky 401(k) plan, you can still make the best of a bad situation. All you have to do is take a look at the big picture, think outside the box and make smart moves to put yourself on track for a solid retirement.


W. Ben Utley, CFP®, is an attending advisor with Physician Family Financial Advisors, a fee-only financial planning firm helping physicians throughout the U.S. to save for college and invest for retirement.

Lawrence B. Keller, CFP®, CLU®, ChFC®, RHU®, LUTCF, is the founder of Physician Financial Services. Based in New York. He offers income protection and wealth accumulation strategies for physicians nationwide.

This article originally appeared in Orthopreneur with the title "Overcome 401 (k) LImitations: Three Ways to Make the Best of a Bad Situation".

Eight resolutions for physician family finances in 2014

Physicians who use Andrew Schwartz for their taxes have already receive his monthly MD Taxes newsletter. In case you missed this month’s issue, I’m reposting the feature article here, with Andrew’s permission. Personal financial planning is an ongoing process.  The good news is that financially speaking, 2013 was a really good year. The stock markets are at all time highs.  Many real estate markets around the country rebounded nicely.  And interest rates remain near historic lows.

Hello 2014.  Who knows how financially friendly this year will be for physicians? For that reason, here are some prudent steps you can take to keep your personal finances moving on the right track:

  •  REset your retirement savings:  Most physicians find it easier to max out their retirement contributions by budgeting a set amount each month.  Instruct your employer to withhold $1,458.33 per month for your 401(k) or 403(b) plan to ensure that you hit the max of $17,500 in 2014.  Are you self-employed?  If so, you can sock away up to $52,000 next year into a SEP, Keogh or Solo 401(k), which equals $4,333.33 per month.  And if you'll be 50 or older by December 31st, the maximum 2013 contribution jumps to $23,000 for 401(k) and 403(b) salary deferrals and $57,500 for Solo 401(k)'s.
  • REfinance your home mortgage:  Back in 2012, my wife and I locked in a fifteen-year fixed-rate mortgage at 2.875% with no points.  While mortgage rates are no longer that low, according to our go to mortgage guy Bob Cahill of Leader Bank, there are still a variety of low-rate mortgage products currently available to physicians looking to purchase a new home or refinance an existing mortgage.
  • REduce your personal debt: Over time, physicians and businesses seem to have forgotten that any money borrowed needs to be repaid.  Remember, leverage equals risk.  Make 2014 a year to pay down some of your personal debt.  Perhaps you can delay the purchase of a new car, scale down your awesome vacation, or settle for a 42 inch flat screen TV.
  • REvise your savings and debt reduction goals: Take a few minutes to set new savings goals including how much you’d like to put away towards your retirement, a child’s education, and/or the down payment on a home, and also to reset how much you plan to pay down your student loans, personal debt, and home mortgage.  Ask for our free debt/savings calculator to help you crunch the numbers.
  • REbalance your investment portfolio:   Warren Buffet said it best by stating, "A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful."  During 2013, the stock market posted substantial gains.  By rebalancing your portfolio to its original or updated asset allocation, you lock in gains from the sectors that performed the best and move money into sectors that underperformed and soon enough should be poised to catch up.
  • REcalculate how much your retirement savings will be worth when you retire: With the Dow at all time highs, now's a great time to take a look at how much buying power you can expect to have upon retiring by downloading our (Microsoft Excel) unique on-line retirement calculator.
  • REvisit your life and disability insurance needs: As physicians move through their careers, their disability insurance needs change. Give some thought to how much of these insurances you need versus how much you currently get through your employer’s benefit package and how much coverage you've already purchased for your personal policies.
  • REsolve errors on your credit report:  Each year, you’re entitled to three free credit reports, so there’s no excuse to not look at this important financial report annually, especially since errors are not uncommon.  Order your free report at 

Andrew D. Schwartz, CPA runs MD Taxes, a nationwide network of CPAs who specialize in the tax issues affecting physicians and other healthcare professionals. 

These magic words help physicians avoid big tax surprises in April


"I just got my tax bill and it was a whopper. My tax guy asked me to write a check for about $30,000, which was a total surprise and a shocker since he asked me to write another big check late last year. I had to scramble to come up with the cash, and I don't want this to happen ever again. What I don't get is how this could have happened. When I wrote that last check, he said I would be okay. Did he drop the ball, or what?"


I get this question almost every tax season, usually from physicians in their first or second year of private practice. The largest surprise tax bill I have seen was $150,000! Ouch.

Like the prison warden in the 1967 film classic Cool Hand Luke once said, "What we've got here is a failure to communicate."

As a financial planner for physicians, I know what you want is to have all your taxes paid by year end—before you file your taxes—so you can know how much of the money in your checking account is yours to spend, share, and save.

What your tax preparer  THINKS you want is to avoid paying a penalty for underpayment, and to hang onto your erstwhile tax money for as long as you can.

So when you told your tax guru, "I want to make sure I'm on track with my taxes," what he or she heard was, "Keep me out of trouble with the feds," not "I don't want to owe in April."

There are two things you need to know about taxes and tax people, things they didn't teach you in med school:

  1. Most tax people are genetically pre-programmed to help you pay the least amount of tax possible, as late as possible. It's baked into them from the time they’re born into the tax practice.
  2. The Infernal Revenue Service wants you to pretty much pay-as-you-go, throughout the year, either by having money withheld from your paycheck, or by paying quarterly estimated taxes if you're self-employed.

When your tax guru did your planning, they probably helped you make a "protective" estimated tax payment equal to either 110% of last year's tax liability or at least 90% of whatever they thing you might owe for this year. This protects you from a penalty but it doesn't protect you from a surprise tax bill. (For more on this subject, consult IRS Publication 505.)

To avoid a big surprise this time next year, you need to say something different to your tax nerd when you chat with them in the second half of the year. Instead of saying, "help me plan my taxes," say this:

I want you to help me pay ALL of this year's tax liability before the end of this year. To the best of your ability, I want you to help me pay 100% of my taxes as I go. I understand that by doing this I will be making a small tax-free loan to the government... I don't care. I want to sleep well, knowing that I'm all paid up. I want to know that the money in my savings account is really, really mine, not the fed's. In fact, I would like to pay MORE than I will actually owe. Can you set me up so that I overpay my tax bill by about $1000 this year, so I get a refund next year?

Your tax person may give you a slight scowl (since this goes against their instinct) but that scowl will be far smaller than the grimace you wore this year when you paid your taxes. Don’t worry about it. This is your tax bill, and they work for you. Be polite but firm, and ask them to make it happen.

This way, you'll know how much money you have left in your accounts to spend, share or save. And you'll sleep soundly knowing the jack-booted thugs are not going to kick down your family's door on April 16.

Top Strategies for Physician Wealth Building | Physician's Practice interviews W. Ben Utley CFP®

Healthcare author and financial columnist Janet Kidd-Stewart interviews Certified Financial Planner™ W. Ben Utley, several physicians and other financial planners to reveal the Top Strategies for Physician Wealth Building in this feature-length article for Physician's Practice. Discover tips and advice about saving for retirement, paying for college, buying disability insurance, saving on taxes and planning for a secure financial future.

Latest Tax Changes a Bittersweet Bill for Physician Families

Since 2001, Congress has made nearly 5,000 changes to the Tax Code whose nearly 4 million words make it seven times as long as Tolstoy’s War and Peace but not nearly so easy to read. Congress’s most recent addition to this ongoing saga—the American Taxpayer “Relief” Act of 2012 (ATRA for short)—closes a chapter on tax uncertainty for many physician families at the expense of those earning more than $450,000. It’s a bittersweet bill that will bore you to tears so today I am sharing the cliff notes (yes, pun intended).

ATRA a Bitter Pill for Physician Taxpayers to Swallw

  • Medical specialists are hit hardest. While the Bush era tax rates on the first six marginal tax brackets were made permanent for all taxpayers, Congress (Obama, actually) added a seventh marginal tax bracket that applies to physician families earning  more than $450,000. In my experience, only medical specialists and double-physician families earn this much, so they’ll be paying 4.6 cents more in tax on every dollar they earn above $450,000.
  • Almost every physician will pay more tax. Even though tax rates were effectively frozen, the total tax burden for practically all physicians went up substantially. Families earning more than $250,000 will have their itemized deductions reduced and their personal exemptions will phase out. That means deductions for charitable donations, home mortgage interest and property tax become less valuable.

ATRA Brings Sweet Relief for Physicians in Both Life and Death

  • The "doc fix" is fixed again. Self-employed physicians escaped a 27% reduction in Medicare and Medicaid reimbursements. For some of you, this may be a huge win, particularly those whose census contains a greater proportion of elderly patients. The cuts will rear their ugly heads again on January 1 of 2014 since this is a temporary fix. If history repeats itself though, Congress will extend the doc fix again since they have extended it twelve times since the Medicare Sustainable Growth Rate (SGR) cuts became a part of law via the Balanced Budget Act of 1997. (Hospital docs may feel the pinch though since ATRA levied cuts to hospital reimbursements.)
  • The federal estate tax rules are finally final. With the federal estate tax rate rising from 35% to 40%, the new tax rules may not sound like much of a win for physicians until you consider that rates were set to jump to 55% and the size of a taxable estate was set to fall to only $1 million.Now that the size of a taxable estate has been set to $10.25 million for married couples, there’s reason to cheer because the exemption is permanent now (so you can do your estate planning) and most physicians won’t be taxed at the federal level since the average physician family’s estate is well under $10 million, in my experience.With federal estate taxes more or less resolved for the bulk of physician families, you should turn your attention to state estate taxes if you live in one of the fourteen states that impose their own estate taxes. For example, Oregon taxes estates above $1 million, so that’s an issue for almost all mid-career physician families here in my state.

One of the more interesting provisions of the American Taxpayer Relief Act is a new rule that allows you to do a Roth conversion from your Traditional 401k account to the Roth portion of your 401k without having to leave your job or rollover your money to an IRA.

For most physicians, this in-401k Roth conversion will be useless. But for a tiny fraction of them it offers a chance to save big on future taxes. If you are expecting a big dip in your income (for example, if you take an extended sabbatical without pay or if you are disabled and not earning taxable income for the majority of a tax year), you might consider converting your Traditional 401k to a Roth so that your account will grow tax-free indefinitely. For other physicians earning six figures, the tax hit will likely make such a conversion less than palatable.

In February, Congress will sharpen its pen to write the next chapter, so stay tuned for more coverage in upcoming posts, and thanks for reading.

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